March 25, 2013
Bernanke Continues to Defend Low Interest Rates
Low interest rate policies in the US and central European banks are helping to boost growth around the world, Federal Reserve Chairman Ben Bernanke said today in a speech at the London School of Economics entitled “What should economists and policy makers learn from the financial crisis?”
However, critics are concerned that these low rates are cutting the value of currencies of advanced nations, making their products more competitive in global markets. They say that this might put the developing world at a disadvantage. When the currency of an advanced nation weakens against competitor exporters–including those of the developing world–its goods become relatively cheaper, giving them a price advantage. Such policies–known as “beggar-thy-neighbor’ policies–have been blamed for making the Great Depression worse during the 1930s. When countries devalued their currencies and raised tariffs, foreign-made goods became more expensive and trade decreased.
In the Fed’s defense, Mr. Bernanke said, “Because stronger growth in each economy confers beneficial spillovers to trading policies, these policies are not ‘beggar-thy-neighbor’ but rather ‘enrich-thy-neighbor’ actions.” Rather than lowering the value of a nation’s currency, Bernanke argued, these low-interest rate policies will have the primary aim of boosting domestic growth.
He also said that these policies should actually support stronger trade flows by boosting growth in major economies, so that consumers can buy more imported goods from developing countries.
Critics of the Fed’s low-interest rate policies also worry that they could increase the risk of inflation and destabilize financial markets. Further, millions of baby boomers will be retiring in the next decade, receiving money from unfunded entitlement programs, which will put even more pressure on government spending. And those who are trying to save for the future or are already retired are only getting minuscule returns on their investments.
Former U.S. Treasury Secretary Larry Summers, who is also a supporter of the Fed’s policies, attended the panel and addressed these concerns. He insisted that the biggest threat to the economy right now is high unemployment, and the U.S. economy still requires support to improve this number, which is at 7.7%. “The risks of stagnation are an inherently greater concern than inflation,” Summers said.
During the Fed’s two-day meeting last week, they said they would continue with their plan to keep short-term interest rates at record lows until unemployment falls to 6.5%. This figure, however, is a threshold, not a trigger, for a possible increase, Bernanke said.
While the Fed noted that the U.S. job market has improved, consumer spending and business investment have increased, and the housing market has strengthened, it still does not expect unemployment to reach 6.5% until 2015.
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